You Can’t Talk Growth Without Talking Charters

In the credit union world, charters are everything. As the operating license of any credit union, charters guide how an institution delivers service, markets, and turns a consumer into a member. Credit union growth starts and stops with chartering. We need to talk about it more.

Every credit union leader wants their institution to grow, but few evaluate how their charter is helping them do so.  What if the rules of your credit union’s operations are hampering growth? What if greater fulfillment of your credit union’s mission is a charter evaluation away?

Overview of the Dual Chartering System

At the highest order, there are two types of credit union charters: state and federal. A credit union’s charter type dictates the government party (or parties) responsible for regulating the institution by enforcing all applicable rules and requirements. Unsurprisingly, those rules and requirements vary based on the regulator. Put simply, operational constraints (or the lack thereof) are intrinsically tied to a credit union’s charter.

To land this on something a little more tangible, let’s consider field of membership. As the legal bounds of persons, organizations, and other entities eligible to join a credit union, field of membership is the most-spoken language of credit unions seeking growth.

And why shouldn’t it be? Any institution that desires to grow is going to explore the margins of what is possible within its current framework. The question we want credit unions to ask is: are you operating in the optimal framework?

The answer to that question requires an evaluation of what is possible at both a state and federal level and how your institution is prepared to leverage each regulator’s unique advantages.  This is informed, of course, by the state within which a given credit union operates, and to a lesser degree, its current charter type.  

Charter Characteristics Summarized

State-chartered credit union rules tend to be highly variable in nature: from state to state the regulatory advantages for field of membership tend to be distinct. There are certain states, such as Colorado and Michigan, which enjoy a reputation of being particularly field-of-membership-friendly, while other states, including Wyoming and Arkansas, do not offer the option to be state-chartered. Most fall somewhere in the middle, where certain leniencies are exercised for expansion within the state, while interstate growth can be more challenging.  

The federal chartering system is subdivided into three classifications: community, single common bond, and multiple common bond. Of the three, community and multiple common bond charters tend to be the most common, as single common bond credit unions, per the name, serve only a single employer, association, etc. (i.e., they generally have limited growth).

Federal community charter fields of membership offer intuitive “lives, works, worships, conducts business in” language that promotes an easy transition from consumer to credit union member. To be a compliant federal community charter, a credit union’s field of membership must generally comply with one of three definitions of what the NCUA defines as a well-defined local community or rural district.

There are limitations of the federal community charter, especially for institutions operating in densely populated areas, in geographies containing proximal statistical areas, or for institutions seeking merger opportunities. Many federal credit unions matching any one of these three criteria tend to gravitate toward multiple common bond requirements, though some of our clients have broken the ceiling of what is possible with a community charter.

The multiple common bond charter offers the broadest field of membership opportunity of all federal types. This is because it allows for a combination field of membership style, enabling eligibility through employers, associations, as well as geographic means (i.e., underserved areas). As such, the federal multiple common bond charter can be structured to serve members irrespective of location, whereas the federal community charter is constrained to its underlying geographies. Given this flexibility, the federal multiple common bond charter is often the most advantageous of federal types for those seeking merger opportunities, as it can facilitate compatibility between different credit unions’ fields of membership.

Is a Charter Evaluation Right for You?

There are certain indicators that suggest a charter evaluation might be worthwhile. Asset size is one of them. As the following visualization shows, credit unions at certain asset thresholds tend to be more likely to operate as one charter compared to another. For example, as assets scale from $500M-$10B, we see an increasing proportion of federal multiple common bond and state charters while federal community charters become less prominent.

There are other indicators that suggest a charter evaluation is right. Some of these include:  

• Tightening regulatory policy at the state level;

• Increased interest and opportunity in mergers;

• Inability to memberize all people who solicit loans/shares; and

• Ambition to establish a runway of future growth.

A charter evaluation is an essential step in defining where any credit union stands today and where it might go with a broader understanding. As chartering experts, we’re here to help credit unions navigate the universe of growth opportunity. If a charter evaluation sounds right for your credit union, contact us today.  

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